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Coach Q4 profit surges 86%

BY Marianne Wilson

Coach beat the Street on earnings in the fourth quarter even as its sales declined as the company continued to pullback on shipments to department stores.

Net income nearly doubled to $151.7 million, or 53 cents per share, in the quarter ended July 1, amid a 16% decline in selling and general expenses, compared to net income in year-ago period of $82 million. Earnings, adjusted for non-recurring gains, came to 50 cents per share. Analysts had estimated earnings of 49 cents per share.

Net sales declined1.8% to $1.13 billion from $1.15 billion in the year-ago period, missing estimates. (The prior-year period included an extra week of sales.) Total North American Coach brand sales increased 4% over prior year, while North American direct sales rose 5% on a dollar basis and 6% on a constant currency basis for the quarter. Both North American aggregate and bricks-and-mortar same- store sales rose approximately 4%.

Coach noted that, as planned, sales at North American department stores declined approximately 40% at a POS and approximately 20% on a net sales basis as the company has now started to anniversary the pullback in shipments into the channel.

Neil Saunders, managing director of GlobalData Retail, said that Coach's decision to reduce reliance on department stores is justified by the increasing gap between their selling environments and those in Coach's own stores.

"Over the past half year, Coach has put considerable effort into store displays and collections and, in our opinion, these now look very compelling and engaging," he said. "Indeed, we believe that window displays and the general selling environment have been elevated a long way from the rather clinical atmosphere of older Coach stores, and are now more inspirational and engaging. In contrast, most department stores continue to go downhill rapidly and are becoming increasingly unsuited to selling premium products." (For more, click here).

For the full year, Coach's net income totaled $591 million on a reported basis, with earnings per diluted share of $2.09. This compared to reported net income in the prior year of $461 million with earnings per diluted share of $1.65 in the prior year.

“Our strong fourth quarter results – in which we achieved mid-single-digit North America comparable store sales for the Coach brand and drove solid growth at Stuart Weitzman – capped an excellent FY17 performance for the company," said Coach CEO Victor Luis." For the year, we posted a double-digit increase in net income as we continued to make progress on our brand and company transformation plan. We generated positive Coach brand North American comps in each quarter, while driving solid international Coach brand sales gains, notably in Europe and Mainland China."

Luis said the company took a major step in its corporate transformation with the acquisition of Kate Spade & Company, which closed in July and made Coach the first New York-based house of modern luxury lifestyle brands.

"Kate Spade brings a new, unique brand attitude and an additional consumer segment to the Coach, Inc. portfolio and we expect that this acquisition will enhance our position in the attractive and growing $80 billion global premium handbag and accessories, footwear and outerwear market," he stated.

"Today, after the successful integration of Stuart Weitzman and the acquisition of Kate Spade, we are at an exciting and pivotal moment in our journey," Luis said. "In an unpredictable environment, we are evolving to drive our long-term success by reinventing ourselves, moving from a single-brand, specialty retailer, to a true house of emotional, desirable brands built on our unique values."

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Analyst: Coach turnaround in full swing

Coach ends its fiscal with a set of strong results that signify the turnaround program is making excellent progress. Although sales shrunk in both North America and Europe, this is because this quarter was a week shorter than the same period last year. When this is stripped out, total Coach brand sales rose by 5%, or by 7% on a constant currency basis.

Within North America, the same story holds true. Reported sales were down just over 3%; taking into account the shorter quarter, sales rose by 4%, while direct to consumer sales were up by 5%. These are the strongest revenue figures of the fiscal and were especially positive given Coach was up against a high comparative from the prior year when North American sales rose by 9%.

The North American figures also come against a backdrop in which Coach continues to pull back from department stores, where brand sales were down 40% on a POS basis or 20% in net sales terms. The company is now lapping the anniversary of when it first started to dial back its involvement with department stores, and we are encouraged that the impact has been positive for the brand, helpful to profit, and ultimately beneficial for sales.

The decision to reduce reliance on department stores, while an obvious move, is justified by the increasing gap between their selling environments and those in Coach's own stores. Over the past half year, Coach has put considerable effort into store displays and collections and, in our opinion, these now look very compelling and engaging. Indeed, we believe that window displays and the general selling environment have been elevated a long way from the rather clinical atmosphere of older Coach stores, and are now more inspirational and engaging. In contrast, most department stores continue to go downhill rapidly and are becoming increasingly unsuited to selling premium products.

Thanks to these efforts, in our view, the repositioning of the Coach brand is now almost complete. The label is now back to a position of strength and is held in high regard by consumers. This is a marked turnaround from where it was a couple of years ago when constant discounting and oversaturation had eroded much of the brand's equity and had reduced the premium shoppers were willing to pay. Our data now show that Coach has rebuilt its favorable image with consumers and that it is increasing its market share in the premium handbags and accessories segment of the market. Admittedly, the brand has more work to do to maintain this momentum, but it is clearly on the right track.

In addition to the sales uplifts, Coach's efforts delivered an 86% improvement in net income, even after a higher interest expense. This is a solid gain, but it is clear that on both this and the sales front, future contributions from Coach are likely to be less generous. This is not down to any particular problem with the brand, but merely a reflection that the recovery program will lap tougher comparatives in the year ahead.

Fortunately, the acquisition of Kate Spade gives the company a new growth vector in fiscal 2018. Over the course of the year, this along with the organic growth at existing businesses should add $1.2 billion to the topline. Profits, at least at operating level, will be aided by the $30-35 million of synergy savings from the integration. However, it is also clear that there will be some short-term pressure as Coach pulls Kate Spade back from wholesale and its exposure to unfavorable channels, as well as reduces the number of flash sales with which the brand is involved.

In essence, Coach is hoping to rebuild the Kate Spade brand in the way it has done with its own label. If it succeeds, and we believe it will, it will emerge as a significant luxury player and one that, ultimately, will probably be keen to make further acquisitions.

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Off-price giant shines in Q2; sees plenty of room for store growth

BY Marianne Wilson

TJX Companies showed strong momentum in the second quarter, fueled by strong traffic across all its brands.

The off-pricer retailer on Tuesday reported earnings, sales and same-store sales that topped analysts' expectations.

Total sales rose 6% to $8.36 billion, beating analysts' estimates of $8.29 billion, in the quarter ended July 29. Same-store sales rose 3% for the quarter. By brand, same-store rose 7% at Home Goods and TJX Canada; 2% at Marmaxx (TJ Maxx and Marshalls); and 1% at TJX International.

TJX's strong showing comes as the chain gets ready to debut another home concept, HomeSense, in the U.S. The first location opens Aug. 17, in Framingham, Mass. The company has said that HomeSense will complement its existing — and still growing — HomeGoods brand.

Neil Saunders, managing director of GlobalData, commented that TJX's decision to open a new U.S. seems "particularly sound."

“This will allow the company to better take advantage of the strong growth in home retail and to grow its presence in categories, like furniture and larger furnishing items, which are a relatively weak part of HomeGoods proposition," Saunders said. “Given that these categories are not ones in which many other off-price retailers operate, we believe that HomeSense can make some substantial market share gains over a short period.”

On the chain's quarterly call, CEO Ernie Herrman said that, long term, TJX has the potential to open up to 5,600 stores under its current banners, which is 1,700 more locations than it currently has.

"We continue to see store openings as an attractive investment and a very good use of capital," he said.

TJX's net income in the quarter slipped 1.6% to $552.6 million, or 85 cents per share, amid increased expenses, compared with $562.2 million, 84 cents per share, in the year ago period. Excluding one-time items, the retailer earned 85 cents per share, edging past analysts' estimates by one cent.

“I am very pleased with our strong second quarter results," stated Herrman. "Customer traffic was up and was the primary driver of our comp store sales growth at every division and overall merchandise margin was up, which we see as excellent indicators of the fundamental strength, consistency and flexibility of our business. In addition, we are confident that we are gaining market share at each of our four major divisions."

The company raised its forecast for adjusted earnings to $3.78 to $3.82 per share, from $3.71 to $3.78 for the year ending January 2018. Analysts on average were expecting $3.89 per share.

"Looking ahead, we see exciting opportunities for our business in the second half of the year," said Hermann. "We believe we are set up extremely well to take advantage of the abundant buying opportunities in the marketplace. We have great liquidity in our inventories and we continue to grow our global sourcing universe of over 18,000 vendors, as we constantly open new vendor relationships and strengthen our existing ones."

During the second quarter, the company increased its store count by 51 stores to a total of 3,913 locations.

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